Suppose a firm’s common stock has just paid a dividend of $2. You expect the dividend to
grow at the rate of 10% per year for the next 3 years; if you buy the stock, you plan to hold
it for 3 years and then sell it. Assume that the appropriate discount rate is 12%.
Find the expected dividend for each of the next 3 years. What is the expected $ dividend in
three years from now?
Calculate the present values of the dividends in years 1, 2, and 3. What is the sum the
present values of the dividends in $?
Assume that you expect the price of the stock to be $36 in 3 years from now after dividend
payment. What is the present value of this expected future stock price?
If you plan to buy the stock, hold it for 3 years, and then sell it for $36; what is the
maximum price you should pay for it (according to the NPV rule)?
Assume that after the three years, the growth rate drops to g=5% and stays there forever.
What is the stock price in $ after the dividend has been paid in three years.
What is the present value of the stock returns under the conditions of the previous
question (g=0.05) including the dividends in the first three years?
